WHEN ALIMONY PAYMENTS decrease substantially or end during the first three calendar years, the so-called alimony recapture rule can come into play. The three-year period starts with the first calendar year that alimony payments are made under a decree of divorce or separate maintenance or a written separation agreement.
How much could you be liable for? Let our calculator do the number crunching.
Here's what happens when a recapture occurs. At least part of the tax break is transferred from the alimony payer to the alimony recipient in the third year.
In the third year, the person making the payments must report the recapture amount as taxable income. In effect, part of the payer's deductions for the first two years are unwound or "recaptured" as they say in tax lingo.
In the same year, the person receiving the payments is entitled to a deduction for the recapture amount. In effect, part of the recipient's taxable alimony income from the first two years is negated by the Year 3 write-off.
When calculating alimony recapture, the following payments are not included. So, don't enter them into our calculator.
· Payments made under a temporary support order.
· Payments required over a period of at least three calendar years based on a fixed percentage of income from a business, a property, salary or self-employment. In other words, don't count payments that are intended to vary according to your income if such variable payments extend over at least three years.
· Payments that decrease because of the death of either former spouse or the remarriage of the former spouse receiving the payments.